IC vs.employee-Tax problems later on?

HarryHK · Jan 1, 2006

It is definitely true that IC is not for everyone. And the corollary is that it may not be right for anyone, all the time. And sure, it is great to have a public forum, but we can not always share here. I've already been booted once before from here for commenting on the negativism of some posters here.

I heard something interesting on NPR last week about an interesting quality of CEOs. They are invariably optimistic about their company, no matter how badly things were going. Midlevel managers did not have this characteristic. I myself consider myself a pragmatist and think everything through, more of a pessimist preparing for the worst than anything else. That said, in my opinion, forums such as this should provide helpful advice to those seeking to become successful. There is a place for bad news, but to say it is not worthwhile is not a good role model for success.

In any endeavor, there will be nay sayers who will give you lots of reasons why something can't or shouldn't be done. These people are rarely as successful as those who search for ways it can be done.

I'm here as an example that independent contracting can be hugely financially successful as a single practitioner. And one comment that stands out no matter what the financial rewards (many small businesses do not do as well as employees do), is that sense of freedom and control over your life that having your own business can engender.

suzanne4, RN · Jan 2, 2006

Hello Harry,
Thank you very much for the response to all the posts. I have sat back and listened to everyone and was going to post a reply to suzanne4 & Eddy but you beat me to it. And said it as good and if not better than I could. Like I said before you will never get rich being someone elses employee it is only when you take the chance and yes the risk to strike out on your own and take control of your destiny that you have a chance to acheive the dreams that you know exsist. I never said that it is an easy road, that you can sit back and have all the free time you have enjoyed before you became independent. Working for yourself takes time I do agree but it is time well spent if you succeed. It is a risk and I am sorry if suzanne4 did not succeed but it does not mean that it can't be done and I know quite a few people that are doing it, with success. So Harry I agree with your post whole heartily.

Funny thing is that I did succeed and did quite well, but at this point in my life, I am finding it easier just to sit back and collect the checks and not have to deal with anything. There is quite a bit of paperwork that need to be filed, and especially if you are doing things on your own.

Would I do it again? Not right now, I like having my time to do with what I like, and not the paperwork. You need to keep fanatical records, and I started when computers were just on everyone's wish list. It can be done, but it does take alot of extra time.

suzanne4, RN · Jan 2, 2006

I agree, well said by Harry; I too am an independent. I think, there are many ways for Nurses to be successful and our circumstances are ALL different. There are times in our professions that IC is beneficial and I am sure Suzanne had great successes in her business; for now, working in Ca. (high rents, high overhead, etc.) it may be easier for now to do a regular Travel Contract and let someone else deal with the details.
Is't it incredible the options we do have and the ability of this website to freely provide the support and guidance?
To me, there is no one or two right answers jsut informed options that we can help each other with. We ALL win... we are ALL right.

Thank you....................:wink2:

suzanne4, RN · Jan 2, 2006

Another thing that you may not be aware of, there have been hospitals that have suddenly cancelled all of their travel contracts, as well as agecny, and if you have signed a lease in your name as well as all of the deposits, you are stuck with the bill if there are no other facilites in that area hiring travellers.

Something to consider.

suzanne4, RN · Jan 2, 2006

Dead right! Boy, there is a lot of misinformation on this thread!
The simplest way to analyze whether it is worth it to become an independent is that all costs that you have to pay, your former employer also had to pay as well as turn enough profit to pay himself and office costs. That profit is now yours! Gross agency profit after ALL direct nurse costs are paid (wages, taxes, housing, workers comp, unemployment, travel, etc.) runs between 20 and 30 percent of the bill rate. Stated in difference from pay as an employee, about $15 an hour more money before any tax advantages are thrown in. $15 an hour represents roughly the median family income in America, it is not to be sneezed at!
I'm not an expert and I have nothing to sell but I did work nine months this year as an independent. I did have an ideal "perfect storm" in terms of costs and revenue and deductions, but after meeting all personal costs and business costs for the entire year (not just nine months), I netted $90,000 in the bank after taxes. That was for an average 42 hours a week. Try that as an employee! I'm certainly not broke yet!
The reason why most people choose the employee route is that they are risk adverse. And not all could do it anyway. Besides being able to take calculated risks for rewards (vision), there is the questions of business ability, personal circumstances, and market conditions. And in the broad macro-economic view, it would not be efficient for all workers to be independents. But for the few that can, the rewards are there. I think the purpose of this forum is to encourage entrepreneurship, not to discourage it. Let's give newcomers some support!
The insurance that hospitals require of agencies cost me $265 this year for both professional liability and general liability.
The cost to incorporate is under $200 in most states, with California being the obvious exception to this rule. $125 in mine, with ludicrously easy paperwork that basically consisted of typing my name and address four times. Certainly not worth paying an internet site even $100 to "assist".
Looking at the IRS rules about a personal service corporation does make it look like a nurse contracting themselves out fits the rule. It is my belief that we are not, but I'm still working on proof. My logic goes that the rules apply for those who provide services to the end user. As an agency, we are providing contract employees to the hospital, it is the hospital that is providing the professional services. We are not billing the end user as in the case of all other professional service agencies.
Actually, this specific scenario does not get you off the hook. Read IRS Publication 542 for the bad news.
But it is irrelevant anyway. Sure, PSCs are subject to a 35% tax. But that is a tax on PROFITS. Regardless of business form, you probably should not be leaving any money in a corporation. All revenue should be expensed as expenses and wages. So no company taxes. It is true that every state has some sort of corporate minimum tax, but it is not onerous. In my state it is called a franchise tax and it is $50. In other states it is called a filing fee, generally not over $100 a year if no profits.
Taxes are easy. A corporate 1120A tax return is much easier than itemizing personal taxes for example. Payroll is harder, most find it worthwhile to use a payroll company. Software is readily available, but you still have to file with all the taxing agencies.
Personally, I recommend a C corporation, but many independents do an S corporation or an equivalent "pass through" LLC entity. The only benefit to an S corp is that you can pay yourself a "reasonable" salary and the rest is a K1 distribution not subject to FICA (a 15.3% advantage). But as traumahawk99 implied, it is an ambiguous standard. A little scary if you get audited.
A C corp makes up for this in that you can do profit sharing to your 401 that is also not subject to FICA. This is solid and well defined, not subjective. In addition, all healthcare costs are deductible, not just insurance.
It is not just a "few dollars", and actually, audit rates are much lower for all types of corporations compared to a sole proprietor. The IRS believes, as do most people, that it is just too much for most people to consider incorporating just to save on taxes.
Did you have your own agency where you were providing all the services yourself? Or were you working in an office trying to make a living contracting out others? If the latter, then I agree with you. Really doesn't take a lot of business acumen if the former. You just keep on doing the same thing you were doing before, just bill the hospital instead of the agency. Sure it is more work, but I have doubled what I put in the bank as an independent compared to what I did as a very well paid traveler for traditional agencies. I'm frugal so doubling was no mean feat.
I think that is the point, to be a vendor to the hospital rather than an employee. But your point about having to wait to get paid is well taken. Anyone wanting to become independent should have at the very least, three months of expense money. After invoices start being paid, your reserve no longer matters except as prudent financial management.
Yes, it is worthwhile to be an independent and an entrepreneur. If not, then this whole subforum lacks any reason for existence.
Happy New Year All!

Sure, being independent can work for some, but the original poster was asking about doing it for the tax breaks. And in the long run, if you do not have the experience in running a business, then paying others to handle those services for you will outweigh your profits. And that is what it comes down to in the end.

And sure, I still my own my other businesses, and would't have it any otrher way. And couldn't for what I do.

HarryHK · Jan 2, 2006

Funny thing is that I did succeed and did quite well, but at this point in my life, I am finding it easier just to sit back and collect the checks and not have to deal with anything. There is quite a bit of paperwork that need to be filed, and especially if you are doing things on your own.
Would I do it again? Not right now, I like having my time to do with what I like, and not the paperwork. You need to keep fanatical records, and I started when computers were just on everyone's wish list. It can be done, but it does take alot of extra time.

Hi Suzanne, not wanting to be offensive, but what exactly did you do for your own business? My experience as a sole practitioner company is quite different. I spend about 10 minutes a week on paperwork. It takes about two hours total work on documents and communicating with a new hospital for each new assignment. My taxes at the end of the year takes about three hours. I do save myself some time by paying myself only once a year (I do reimburse myself for expenses - a non tax event - every assignment though).

Computers do make it easier, but there is just not that much paperwork. Contracts initially, invoices and payments, keeping receipt copies, that is about it! My payroll company takes care of the tax filings. I have no office, no employees (other than myself), what else am I missing?

I've been doing this for three years now, I think I have a good handle on it. It is no where near as hard as most people think. Very little to no regulation. "Low barriers to entry" is the business term. That is why we see dozens of new agencies starting every year, most to try to make a living off of the work of others, a very different kettle of fish that just contracting yourself out.

The extra time that you have to do is learning about the process and general business details, developing a contract and so on. That was all upfront, no longer takes any of my time. Most of the stuff you have to do for each contract is stuff you already do as a traveler - work history, skills list, physical and so on.

Another thing that you may not be aware of, there have been hospitals that have suddenly cancelled all of their travel contracts, as well as agecny, and if you have signed a lease in your name as well as all of the deposits, you are stuck with the bill if there are no other facilites in that area hiring travellers.
Something to consider.

Sure, there are always risks. The same thing can happen to a regular traveler who was counting on a housing stipend that now is not going to happen. With signed contracts, you can theoretically recover in court but it is usually more trouble that it is worth. With over 100,000 travel contracts a year, this does not happen very often on a percentage basis.

As it happens, this did happen to me while on a direct contract. Offered to settle for the cost of my prepaid housing, was turned down, sued them successfully and even more surprising, actually collected the balance of the contract! But I would never pay for housing without a signed contract. Neither do regular agencies.

Anything else? You (or I) could come up with a billion problems that could happen, or be a good reason not to even try, but coming up with solutions is what I'm going for here, not reasons why someone can't succeed.

Sure, being independent can work for some, but the original poster was asking about doing it for the tax breaks.

Sure, that is a major reason to become independent. Our tax system is biased for corporations and against taxpayers. Your point?

And in the long run, if you do not have the experience in running a business, then paying others to handle those services for you will outweigh your profits.

I prefer to do all my own stuff. Other than learning how to do it, it is not that much work. But let's look at what it costs to offload the work. How much do you think it might cost? Here is my breakdown of ongoing costs:

$300 to $500 a year to a tax professional to fix your books and returns and file quarterly estimated taxes.

$200 a year to a payroll company.

$100 a year corporate franchise tax.

$100 a year for someone to boilerplate your corporate documentation (annual meetings and so on). Or $20 one time for a book with a CD-ROM that has the same stuff.

I make that as a $1,000 a year or less for tax deductible professional costs. Probably well worth it for those who prefer not to do that work. Balance that against the $50,000 extra (no kidding) that you can put in the bank every year. Most would consider it worthwhile. You don't, that's fine. It is not for everyone. But please stop being discouraging for the rest of us, it is not helpful.

Incidentally, regular agencies seem to think that paying for these services (whether in house or external) do not outweigh the profits. They do not for individuals either.

eddy · Mar 16, 2006

Another thing that you may not be aware of, there have been hospitals that have suddenly cancelled all of their travel contracts, as well as agecny, and if you have signed a lease in your name as well as all of the deposits, you are stuck with the bill if there are no other facilites in that area hiring travellers.
Something to consider.

Good point. This rarely happens, but it does happen enough that an aspiring IC should be aware of it as a risk.

While most travel contracts are legally binding for the time commitment the hospital has signed for, they know that they have very little to worry about if they cancel them. They know that most, while very angry, will just move on. They have little risk of being sued, and they know it.

NephroBSN, BSN, RN · Mar 17, 2006

Hi Suzanne, not wanting to be offensive, but what exactly did you do for your own business? My experience as a sole practitioner company is quite different. I spend about 10 minutes a week on paperwork. It takes about two hours total work on documents and communicating with a new hospital for each new assignment. My taxes at the end of the year takes about three hours. I do save myself some time by paying myself only once a year (I do reimburse myself for expenses - a non tax event - every assignment though).
Computers do make it easier, but there is just not that much paperwork. Contracts initially, invoices and payments, keeping receipt copies, that is about it! My payroll company takes care of the tax filings. I have no office, no employees (other than myself), what else am I missing?
I've been doing this for three years now, I think I have a good handle on it. It is no where near as hard as most people think. Very little to no regulation. "Low barriers to entry" is the business term. That is why we see dozens of new agencies starting every year, most to try to make a living off of the work of others, a very different kettle of fish that just contracting yourself out.
The extra time that you have to do is learning about the process and general business details, developing a contract and so on. That was all upfront, no longer takes any of my time. Most of the stuff you have to do for each contract is stuff you already do as a traveler - work history, skills list, physical and so on.
Sure, there are always risks. The same thing can happen to a regular traveler who was counting on a housing stipend that now is not going to happen. With signed contracts, you can theoretically recover in court but it is usually more trouble that it is worth. With over 100,000 travel contracts a year, this does not happen very often on a percentage basis.
As it happens, this did happen to me while on a direct contract. Offered to settle for the cost of my prepaid housing, was turned down, sued them successfully and even more surprising, actually collected the balance of the contract! But I would never pay for housing without a signed contract. Neither do regular agencies.
Anything else? You (or I) could come up with a billion problems that could happen, or be a good reason not to even try, but coming up with solutions is what I'm going for here, not reasons why someone can't succeed.
Sure, that is a major reason to become independent. Our tax system is biased for corporations and against taxpayers. Your point?
I prefer to do all my own stuff. Other than learning how to do it, it is not that much work. But let's look at what it costs to offload the work. How much do you think it might cost? Here is my breakdown of ongoing costs:
$300 to $500 a year to a tax professional to fix your books and returns and file quarterly estimated taxes.
$200 a year to a payroll company.
$100 a year corporate franchise tax.
$100 a year for someone to boilerplate your corporate documentation (annual meetings and so on). Or $20 one time for a book with a CD-ROM that has the same stuff.
I make that as a $1,000 a year or less for tax deductible professional costs. Probably well worth it for those who prefer not to do that work. Balance that against the $50,000 extra (no kidding) that you can put in the bank every year. Most would consider it worthwhile. You don't, that's fine. It is not for everyone. But please stop being discouraging for the rest of us, it is not helpful.
Incidentally, regular agencies seem to think that paying for these services (whether in house or external) do not outweigh the profits. They do not for individuals either.

Are you an RN? Did I read that you worked 9 months last year? Does that mean you graduated from a 2 year nursing school at 18? When did you get your year's worth of experience or did you come right out of school and become an IC?

Just really curious.

19 seems a little young.

Whoa I didn't read all of this post. I was going by your other posts here. And you've been doing this for THREE YEARS.. How did you become an RN at 16?

HarryHK · Mar 27, 2006

Are you an RN? Did I read that you worked 9 months last year? Does that mean you graduated from a 2 year nursing school at 18? When did you get your year's worth of experience or did you come right out of school and become an IC?
Just really curious.
19 seems a little young.
Whoa I didn't read all of this post. I was going by your other posts here. And you've been doing this for THREE YEARS.. How did you become an RN at 16?

Not sure where you got that from. I did not quote my entire work history. I don't see how it matters, but I was 37 when I graduated from nursing school. I worked at one hospital for 3 years, traveled for the next 10 years. Of those 10 years traveling, the last 3 have been almost exclusively independent (one assignment for an agency because I wanted to go to the Virgin Islands). Last year I did three contracts for a total of nine months working last year.

Does that clear it up?

nursemicke · Mar 27, 2006

Harry, look at your posts. Under age you put 19. Enjoy your responses on this forum.:)

HarryHK · Mar 28, 2006

Thanks, never noticed that before. It's been fixed.